THE IMPACT OF MICROFINANCING INSTITUTIONS ON THE LIVELIHOOD OF THE RURAL POOR

By

Abinet Gebrekidan

ADAMA UNIVERSITY

DEPARTMENT OF BUSINESS MANAGEMENT

May, 2006

ADAMA

CHAPTER ONE

INTRODUCTION

Poverty is not uncommon problem of almost all developing countries. Ethiopia is one the leading less developed countries (LDCs) that has been experiencing the bad consequences of poverty. As the result, the socioeconomic crises that occurred in different periods have been beyond what the country could resist. Above 85 % of the population is living on agriculture which is rain fed. The fate of the countryÐŽ¦s exports earnings and household consumption directly depend on the performance of agricultural sector. Even though this sector is the mainstay of the economy, it couldnÐŽ¦t fully support the massive dependents in a sustainable way. The natural catastrophes, declining size of land holdings, inadequate supply of farm technologies etc are the factors that limit the agricultural production in the country and farm level.

Due to the above fact, the countryÐŽ¦s main and immediate objective is to strive to break the vicious cycle of poverty and to alleviate and/ or reduce the magnitude and extent of poverty. In this struggle, as to all poor countries, the binding constraint is capital formation (i.e. investment from domestic saving and external injection) to alleviate poverty and encourage investment by poor. In this regard, the micro-finance institutions (MFIs) recently gain more and more acceptance.

In addition to banks and insurance companies, micro-financing institutions have continued to play an important role in giving credit and saving facilities to micro sectors of the economy. As of June 2002, 21 micro-financing institutions, with paid up capital of more than birr 38 million are operating in different regions of the country. They mobilized Birr 255 million deposits, from small holders and gave loans amounting to Birr 349 million by end of June 2002. Accordingly, over half a million people, particularly those living in rural areas are estimated to have become beneficiaries of the services of micro-financial institutions. (NBE, Annual Report).

1.1. Statement of the Problem

Micro finance institutions are increasing in number and area of coverage in our country. But the problem is dealing with the poor (especially with credit related issues) is not as easy as poverty alleviation so that this may challenge their contribution to development. That means the rural poor have less organized way of living, widespread illiteracy and the like which hinders from participating in credit and saving programs; and hence the effort of those programs may be challenged.

A recent annual report of NBE tell that the number of MFIs has reached 22 at the end of fiscal year 2002/03. Their total capital stood at Birr 299 million and mobilize deposits of Birr 302 million. Of the total MFIs, 10 were operating in Addis Ababa and 5 in Oromia. Three MFIs jointly accounted for 31 percent of the total capital, 12.1 percent of total savings mobilized, 21 percent of total credit allocation and 20.4 percent of total assets. The two biggest MFIS namely, Amhara and Dedebit Credit and Savings institutions alone accounted for 59 percent of the total capital, 80 percent of the savings, 71 percent of the credit and 71 percent of the total assets of MFIs.

1.2. Objectives of the study

The study has the following major objectives:

1. To assess the role and impact of micro-finance institutions on the livelihood of rural poor.

2. To assess factors that hinder the rural poor from participating in Micro finance Institutions

3. To draw conclusion and give some policy recommendations for the successful implementation and development of micro financing programs.

1.3 Methodology of the study

Secondary sources are used in this study. These sources are obtained from different organizations like Association of Ethiopian Micro-finance Institutions (AEMFI), the National Bank of Ethiopia, different journals, annual reports and books, etc.

1.4. Limitation of the study

The main limitations of this study are: shortage of time and the types of the data used i.e. the study solely depends on secondary data from different sources.

CHAPTER TWO

LITERATURE REVIEW

2.1. The Need For Micro-Financing

According to Khandker (1998), the alleviation of poverty requires diverse measures. The most important being those, which expand the income and employment opportunities of the poor, enabling them to enhance their living standards providing the poor with access to financial services is one of the many ways to increase their income and productivity.

Binswanger and Landell-Mills (1995) states that constraints in relation to suppliers.i.e. Private Banks excludes the poor because small transactions are unprofitable. Providing financial services to the poor and women is not easy. Many borrowers are not credit worthy and don't have profitable projectors. Thus, that the need for micro financing is an undeniable fact.

According to Yanor, Benjamin and Pipren (1997), the issue that should be raised in this context is the importance of the informal sector in LDCs economy and its constraint to develop by lack of credit. On top of that, Salad vine and checkering (1991) confirmed this fact by noting that, ÐŽ§the informal sectorÐŽÐ which contributed about 35% to 65% and 20% to 40% to employment and GDP in most LDCs respectively, is constrained by lack of credit.

Micro financing programs are developed to fill this gap. The rural poor in LDCs are in desperate needs of credits, microfinance programs are supposed to make available this credit needs and keep the poor to increase their living standard. Lack of saving and capital make it difficult for many poor people who want jobs in the formal and informal sectors to become self employed and to